Sunday, December 6, 2009
Share
In financial markets, a share is a unit of account for various financial instruments including stocks (ordinary or preferential), and investments in limited partnerships, and REITs. The common feature of all these is equity participation (limited in the case of preference shares).
The term stocks in the plural is often used as a synonym for shares. Traditionalist demands that the plural stocks be used only when referring to stock of more than one company are rarely heard nowadays.
Shareholders and dividends
The income received from shares is called a dividend, and a person owning shares is called a shareholder.
Valuation
Shares are valued according to various principles in different markets, but a basic premise is that a share is worth the price at which a transaction would be likely to occur were the shares to be sold. The liquidity of markets is a major consideration as to whether a share is able to be sold at any given time. An actual sale transaction of shares between buyer and seller is usually considered to provide the best prima-facie market indicator as to the 'true value' of shares at that particular moment.
Tax treatment
Tax treatment of dividends varies between territories. For instance, in India, dividends are tax free in the hands of the shareholder, but the company paying the dividend has to pay dividend distribution tax at 12.5%. There is also the concept of a deemed dividend, which is not tax free. Further, Indian tax laws include provisions to stop dividend stripping.
Share certificates
Investors were given share certificates as evidence of their ownership of shares but certificates are not always issued nowadays. Instead, the ownership may be recorded electronically by a system such as CREST.
Different Types of Shares
The different types of shares are:
Blue chip stocks: These are companies with solid foundations and which have decades and centuries of history. These are low growth companies. But these will give you a stabilized return. These have consistent dividend paying history. These companies are diversified into various sectors and hence are good bets to invest for the long term. The Dow 30 consists of most of these stocks. These companies have lower and stabilized growth but they are safer bets over the long term to park your money and can give surprising compound annual returns over the long term.
Growth stocks: These are in great flavour. These are companies which show high growth in their turn over as well as share price. These companies are in the buzzing sectors of the economy. Generally these are not as old as the blue chip ones. These are very expensive in terms of the price to earning multiple as compared to the other stabilized companies. They can have huge ups and down in their stock price in a few trading sessions due to the large trader interests. All the blue chip stocks go through this phase before stabilizing. Negative news related to these companies can set back the price of these stocks by a vast amount.
Speculative stocks:
These are companies with no real fundamental logic. Their stock prices defy the conventional logic. The stock price of these types of companies rises and fall a lot during single trading sessions. The stock prices of these companies are controlled by the huge manipulation in buying and selling of shares rather than by the fundamentals. These types of stocks are very risky and are great money losers. You need to avoid such stocks. This category of stocks consists of stocks priced below 5$.
Range bound shares: The price of these shares doesn't fall or rise too much. These basically remain range bound within 10% range. These types of companies have stagnant growth in profits. These are fundamentally stable companies with no real thrust in profits. These stocks are used in trading on technical basis. These stocks are used by traders to buy at the lower support of the range and are sold off by the traders at the higher end of the range. Thus making a decent profit of 5% to 10% every 5 to 10 days.
Different types of people invest in different types of stocks. You can earn by investing in any of these types of stocks, you just need to find out which type suits your needs.
Reference: ezinearticles.com
The term stocks in the plural is often used as a synonym for shares. Traditionalist demands that the plural stocks be used only when referring to stock of more than one company are rarely heard nowadays.
Shareholders and dividends
The income received from shares is called a dividend, and a person owning shares is called a shareholder.
Valuation
Shares are valued according to various principles in different markets, but a basic premise is that a share is worth the price at which a transaction would be likely to occur were the shares to be sold. The liquidity of markets is a major consideration as to whether a share is able to be sold at any given time. An actual sale transaction of shares between buyer and seller is usually considered to provide the best prima-facie market indicator as to the 'true value' of shares at that particular moment.
Tax treatment
Tax treatment of dividends varies between territories. For instance, in India, dividends are tax free in the hands of the shareholder, but the company paying the dividend has to pay dividend distribution tax at 12.5%. There is also the concept of a deemed dividend, which is not tax free. Further, Indian tax laws include provisions to stop dividend stripping.
Share certificates
Investors were given share certificates as evidence of their ownership of shares but certificates are not always issued nowadays. Instead, the ownership may be recorded electronically by a system such as CREST.
Different Types of Shares
The different types of shares are:
Blue chip stocks: These are companies with solid foundations and which have decades and centuries of history. These are low growth companies. But these will give you a stabilized return. These have consistent dividend paying history. These companies are diversified into various sectors and hence are good bets to invest for the long term. The Dow 30 consists of most of these stocks. These companies have lower and stabilized growth but they are safer bets over the long term to park your money and can give surprising compound annual returns over the long term.
Growth stocks: These are in great flavour. These are companies which show high growth in their turn over as well as share price. These companies are in the buzzing sectors of the economy. Generally these are not as old as the blue chip ones. These are very expensive in terms of the price to earning multiple as compared to the other stabilized companies. They can have huge ups and down in their stock price in a few trading sessions due to the large trader interests. All the blue chip stocks go through this phase before stabilizing. Negative news related to these companies can set back the price of these stocks by a vast amount.
Speculative stocks:
These are companies with no real fundamental logic. Their stock prices defy the conventional logic. The stock price of these types of companies rises and fall a lot during single trading sessions. The stock prices of these companies are controlled by the huge manipulation in buying and selling of shares rather than by the fundamentals. These types of stocks are very risky and are great money losers. You need to avoid such stocks. This category of stocks consists of stocks priced below 5$.
Range bound shares: The price of these shares doesn't fall or rise too much. These basically remain range bound within 10% range. These types of companies have stagnant growth in profits. These are fundamentally stable companies with no real thrust in profits. These stocks are used in trading on technical basis. These stocks are used by traders to buy at the lower support of the range and are sold off by the traders at the higher end of the range. Thus making a decent profit of 5% to 10% every 5 to 10 days.
Different types of people invest in different types of stocks. You can earn by investing in any of these types of stocks, you just need to find out which type suits your needs.
Reference: ezinearticles.com
Saturday, December 5, 2009
Final Accounting Adjustments
CLOSING STOCK
Adjustments in final accounts are the process of recording all those items which have not been including in the trial balance.
The items that typically require adjustments at the time of preparation of final accounts are
•Closing Stocks: Closing stock is the stock of goods that remain unsold at the end of the trading period.
JOURNAL ENTRIES FOR OUTSTANDING EXPENSES
•Outstanding Expenses or Unpaid Expenses: These are the expenses that have been incurred during a particular trading period, but not paid by the end of that period.
GOODS TAKEN OVER BY PROPRIETOR FOR PERSONAL USE
When some of the stock is withdrawn from the business by the proprietor for his personal use, the cost of such goods will be deducted from the purchases and will be added with the drawings of the proprietor.
GOODS DISTRIBUTED AS FREE SAMPLES
This is one kind of advertisement. When goods are distributed to the prospective customers as free samples, an expense is incurred (known as advertisement expense) and there is an usual reduction from the stock of goods.
Adjustments in final accounts are the process of recording all those items which have not been including in the trial balance.
The items that typically require adjustments at the time of preparation of final accounts are
•Closing Stocks: Closing stock is the stock of goods that remain unsold at the end of the trading period.
JOURNAL ENTRIES FOR OUTSTANDING EXPENSES
•Outstanding Expenses or Unpaid Expenses: These are the expenses that have been incurred during a particular trading period, but not paid by the end of that period.
GOODS TAKEN OVER BY PROPRIETOR FOR PERSONAL USE
When some of the stock is withdrawn from the business by the proprietor for his personal use, the cost of such goods will be deducted from the purchases and will be added with the drawings of the proprietor.
GOODS DISTRIBUTED AS FREE SAMPLES
This is one kind of advertisement. When goods are distributed to the prospective customers as free samples, an expense is incurred (known as advertisement expense) and there is an usual reduction from the stock of goods.
Credit Cards, Debit Cards, Stop payment order
Credit Card: Nowadays sales through Credit Cards are a very common feature. Credit Cards are issued by different banks like Citi Bank, Standard Chartered Bank, State Bank of India, Canara Bank, and others Presently available most popular Credit Cards are - Visa Card, Master Card, American Express Card, and others.
Debit Card: A Debit Card is similar in appearance to a Credit Card and is offered in a similar way in payment for goods and services.
The Main difference is that in the case of a Debit Card such payment is debited to the holders Bank account is exactly the same way as a cheque.
Stop payment Order: Sometimes cheques are lost or stolen. The account holder of the lost or stolen cheque should issue a payment order to the bank stating the details of the cheque (e.g. cheque no., date, amount, etc). After issuing the stop payment order, the original entry should be cancelled by reversing the entry.
Debit Card: A Debit Card is similar in appearance to a Credit Card and is offered in a similar way in payment for goods and services.
The Main difference is that in the case of a Debit Card such payment is debited to the holders Bank account is exactly the same way as a cheque.
Stop payment Order: Sometimes cheques are lost or stolen. The account holder of the lost or stolen cheque should issue a payment order to the bank stating the details of the cheque (e.g. cheque no., date, amount, etc). After issuing the stop payment order, the original entry should be cancelled by reversing the entry.
BANK RECONCILIATION STATEMENT
NEED FOR BANK RECONCILIATION:
1.Cheques issued but not yet presented for payment.
2.Cheques paid into the bank but not yet collected.
3.Direct debit made by the bank on behalf of the customer.
4.Amount directly deposited in the bank account.
5.Interest and dividends collected by the bank.
6.Direct payments made by the bank on behalf of customers.
7.Cheques deposited/ bills discounted dishonored.
8.Errors committed in recording transactions by the organization.
9.Errors committed in recording transaction by the bank.
PERFORMA OF BANK RECONCILIATION STATEMENT
To prepare a bank reconciliation statement, the bank balance as per the cash book and the bank statement as on a particular day are required along with details of both the books. If the two balances differ, the entries in both the books are compared and the items on accounts has which the difference has arisen are ascertained with the respective amount involved so that the bank reconciliation statement can be prepared.
1.Cheques issued but not yet presented for payment.
2.Cheques paid into the bank but not yet collected.
3.Direct debit made by the bank on behalf of the customer.
4.Amount directly deposited in the bank account.
5.Interest and dividends collected by the bank.
6.Direct payments made by the bank on behalf of customers.
7.Cheques deposited/ bills discounted dishonored.
8.Errors committed in recording transactions by the organization.
9.Errors committed in recording transaction by the bank.
PERFORMA OF BANK RECONCILIATION STATEMENT
To prepare a bank reconciliation statement, the bank balance as per the cash book and the bank statement as on a particular day are required along with details of both the books. If the two balances differ, the entries in both the books are compared and the items on accounts has which the difference has arisen are ascertained with the respective amount involved so that the bank reconciliation statement can be prepared.
PETTY CASH BOOK
Miscellaneous expenses such as conveyance, cartage, postage, telegrams and so on are common to every organization. These are generally repetitive in nature and it would burden the cashier to record all these payments in the main Cash book. Further, the cash book would become very bulky. Hence, large organizations usually appoint a petty cashier and maintain a separate Cash book to record such transactions. Such a cash book is called a petty Cash
BALANCE SHEET
In financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time.
A company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing."
Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system.
A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.
Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets. Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report.. Large businesses also may prepare balance sheets for segments of their businesses. A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.
Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.
US small business balance sheet
A small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.
Public Business Entities balance sheet structure
Guidelines for balance sheets of public business entities are given by the International Accounting Standards Committee and numerous country-specific organizations.
Balance sheet account names and usage depend on the organization's country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses. If applicable to the business, summary values for the following items should be included on the balance sheet
Assets
Current assets
1.Cash and cash equivalents
2.Inventories
3.Accounts receivable
4.Prepaid expenses for future services that will be used within a year
Fixed assets
1.Property, plant and equipment
2.Investment property, such as real estate held for investment purposes
3.Intangible assets
4.Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents)
5.Investments accounted for using the equity method
6.Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.
Liabilities
1.Accounts payable
2.Provisions for warranties or court decisions
3.Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds
4.Liabilities and assets for current tax
5.Deferred tax liabilities and deferred tax assets
6.Minority interest in equity
7.Issued capital and reserves attributable to equity holders of the Parent company
8.Unearned revenue for services paid for by customers but not yet provided
Equity
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual.
1.Numbers of shares authorized, issued and fully paid, and issued but not fully paid
2.Par value of shares
3.Reconciliation of shares outstanding at the beginning and the end of the period
4.Description of rights, preferences, and restrictions of shares
5.Treasury shares, including shares held by subsidiaries and associates
6.Shares reserved for issuance under options and contracts
7.A description of the nature and purpose of each reserve within owners' equity
A company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing."
Records of the values of each account or line in the balance sheet are usually maintained using a system of accounting known as the double-entry bookkeeping system.
A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.
Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at a specific point in time. Individuals and small businesses tend to have simple balance sheets. Larger businesses tend to have more complex balance sheets, and these are presented in the organization's annual report.. Large businesses also may prepare balance sheets for segments of their businesses. A balance sheet is often presented alongside one for a different point in time (typically the previous year) for comparison.
Personal balance sheet
A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities.
US small business balance sheet
A small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities.
Public Business Entities balance sheet structure
Guidelines for balance sheets of public business entities are given by the International Accounting Standards Committee and numerous country-specific organizations.
Balance sheet account names and usage depend on the organization's country and the type of organization. Government organizations do not generally follow standards established for individuals or businesses. If applicable to the business, summary values for the following items should be included on the balance sheet
Assets
Current assets
1.Cash and cash equivalents
2.Inventories
3.Accounts receivable
4.Prepaid expenses for future services that will be used within a year
Fixed assets
1.Property, plant and equipment
2.Investment property, such as real estate held for investment purposes
3.Intangible assets
4.Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents)
5.Investments accounted for using the equity method
6.Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.
Liabilities
1.Accounts payable
2.Provisions for warranties or court decisions
3.Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds
4.Liabilities and assets for current tax
5.Deferred tax liabilities and deferred tax assets
6.Minority interest in equity
7.Issued capital and reserves attributable to equity holders of the Parent company
8.Unearned revenue for services paid for by customers but not yet provided
Equity
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual.
1.Numbers of shares authorized, issued and fully paid, and issued but not fully paid
2.Par value of shares
3.Reconciliation of shares outstanding at the beginning and the end of the period
4.Description of rights, preferences, and restrictions of shares
5.Treasury shares, including shares held by subsidiaries and associates
6.Shares reserved for issuance under options and contracts
7.A description of the nature and purpose of each reserve within owners' equity
Profit &Loss Appropriation A/c
The Companies Act does not prescribe any specified form for the preparathion of the Profit & Loss Account. This is due to the reason that there are many types of companies and industries, with their own peculiar characteristics, for which one set form may be suitable. However, Part II for the Schedule VI to the Companies Act has specified presentation and disclosure requirements in respect of items income & expenditure. It requires that every Profit & Loss Account of a company should be so prepared as to give a true and fair view of its operation. The Profit & Loss Account of a Company is treated as an annexure to its Balance Sheet.
In the case of companies it is necessary to split the revenue statement into three sections, viz, Trading Account, Profit and loss Account & Profit and Loss Appropriation Account. However, the splitting of the Profit and Loss Account into three sections is not forbidden by the Act. In practice the revenue statement is split into three parts; Trading Account to show gross profit or gross loss, Profit and Loss Account to show Net Profit and Profit and Loss Appropriation Account to show the profit carried to the Balance Sheet.
In the case of companies it is necessary to split the revenue statement into three sections, viz, Trading Account, Profit and loss Account & Profit and Loss Appropriation Account. However, the splitting of the Profit and Loss Account into three sections is not forbidden by the Act. In practice the revenue statement is split into three parts; Trading Account to show gross profit or gross loss, Profit and Loss Account to show Net Profit and Profit and Loss Appropriation Account to show the profit carried to the Balance Sheet.
Trial balance
A trial balance is a list of all the nominal ledger (general ledger) accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance.
The name comes from the purpose of a trial balance which is to prove that that the value of all the debit value balances equal the total of all the credit value balances. Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a businesses performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced.
The trial balance is usually prepared by a bookkeeper who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values.
Reference: Kerala University (B.Com 1st year text books)
The name comes from the purpose of a trial balance which is to prove that that the value of all the debit value balances equal the total of all the credit value balances. Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a businesses performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced.
The trial balance is usually prepared by a bookkeeper who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values.
Reference: Kerala University (B.Com 1st year text books)
Final Accountstatements
Financial Statement is periodic report prepared from the accounting records of a company.
Formats of Financial Statements
Meaning of Trail Balance: Before using the account Balances to prepare final Accounts, an attempt to prove that that the total of accounts with debit balances is in fact equal to the total of accounts with credit balances. This proof of the equality of debit and credit balances is called a Trial Balance.
INCOME STATEMENTS
There is no legal format for the profit and loss accounts. Therefore, it can be presented in the traditional 'T' form, or vertically, in statement form.
Formats of Financial Statements
Meaning of Trail Balance: Before using the account Balances to prepare final Accounts, an attempt to prove that that the total of accounts with debit balances is in fact equal to the total of accounts with credit balances. This proof of the equality of debit and credit balances is called a Trial Balance.
INCOME STATEMENTS
There is no legal format for the profit and loss accounts. Therefore, it can be presented in the traditional 'T' form, or vertically, in statement form.
ACCOUNT
DEFINITION OF ACCOUNTS
An account is a formal record, in the ledger, of all transactions relating to changes in particular item. It is a Used to convey information on transaction.
Classification of Accounts
Accounts can be classified in two ways: (a) Traditional Classification; (b) Modern classification.
TRADITIONAL CLASSIFICATION OF ACCOUNTS
The three types of accounts maintained for transactions with parties are as follows.
1.Real Accounts: They are the accounts of all assets used in the business or belonging to the business. Rule of Real Account is Debit what comes in credit what goes out.
2.Personal Accounts: They are the accounts of the all natural and artificial persons.Rule of personal Account is Debit the receiver credit the giver.
3.Nominal Accounts: They are the accounts of the all income and expenses and gains and losses suffered in business. Rule of Nominal Account is Debit all expenses and losses Credit all incomes & gains.
An account is a formal record, in the ledger, of all transactions relating to changes in particular item. It is a Used to convey information on transaction.
Classification of Accounts
Accounts can be classified in two ways: (a) Traditional Classification; (b) Modern classification.
TRADITIONAL CLASSIFICATION OF ACCOUNTS
The three types of accounts maintained for transactions with parties are as follows.
1.Real Accounts: They are the accounts of all assets used in the business or belonging to the business. Rule of Real Account is Debit what comes in credit what goes out.
2.Personal Accounts: They are the accounts of the all natural and artificial persons.Rule of personal Account is Debit the receiver credit the giver.
3.Nominal Accounts: They are the accounts of the all income and expenses and gains and losses suffered in business. Rule of Nominal Account is Debit all expenses and losses Credit all incomes & gains.
Process of Accounting terms
MEANING OF TRANSACTION
A Transaction is an event or happening that changes an organization's financial position and /or its earning.
RULES FOR DETERMINING CASH OR CREDIT TRANSACTION
1.Cash Purchase, cash sales and all Transaction where the word 'paid' is mentioned are to be treated as cash transaction. For Example: salary Paid, goods sold for cash etc.
2.When a personal name or the name of a firm is mentioned in the transaction, it will be treated as credit transaction. For Example, Goods Sold to X for Rs.500/-.
3.When both cash and personal name are mentioned in the transaction, it will be treated as the cash transaction. For Example, Goods Sold to Y for cash Rs. 1000/-.
Source Documents
1.Sales Order: A customer place order in writing or signs an order for goods and services he wishes to buy.
2.Purchase Order: A business makes an order from another business for the purchase of goods or services.
3.Invoices and credit notes: These are the discussed further below.
4.Petty cash voucher: It is prepared for petty cash expenses.
5.Credit card sales voucher: When Goods are sold against credit card, a credit card sales voucher is prepared by the seller and signed by the customer. Credit card sales are entered in the cash book of cash sales.
Reference: indiataxes.com, Kerala +2 commerce text books.
A Transaction is an event or happening that changes an organization's financial position and /or its earning.
RULES FOR DETERMINING CASH OR CREDIT TRANSACTION
1.Cash Purchase, cash sales and all Transaction where the word 'paid' is mentioned are to be treated as cash transaction. For Example: salary Paid, goods sold for cash etc.
2.When a personal name or the name of a firm is mentioned in the transaction, it will be treated as credit transaction. For Example, Goods Sold to X for Rs.500/-.
3.When both cash and personal name are mentioned in the transaction, it will be treated as the cash transaction. For Example, Goods Sold to Y for cash Rs. 1000/-.
Source Documents
1.Sales Order: A customer place order in writing or signs an order for goods and services he wishes to buy.
2.Purchase Order: A business makes an order from another business for the purchase of goods or services.
3.Invoices and credit notes: These are the discussed further below.
4.Petty cash voucher: It is prepared for petty cash expenses.
5.Credit card sales voucher: When Goods are sold against credit card, a credit card sales voucher is prepared by the seller and signed by the customer. Credit card sales are entered in the cash book of cash sales.
Reference: indiataxes.com, Kerala +2 commerce text books.
ACCOUNTING- an Introduction
Accountancy or accounting is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management.
Accounting is thousands of years old. The earliest accounting records were found in the Middle East which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.
Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.
Accounting has also been defined by the AICPA as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."
Etymology
The word "Accountant" is derived from the French word "Compter", which took its origin from the Latin word "Computare". The word was formerly written in English as "Accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation and in orthography to its present form."
History
The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned.
Luca Pacioli and double-entry bookkeeping
(Father of Double Accounting System was Luca Pacioli)
A double-entry bookkeeping system is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form. The oldest discovered record of a complete double-entry system is the Messari (trans. treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.
Although Luca Pacioli did not invent double-entry bookkeeping, which was developed by merchants in northern Italy sometime during the late 13th or early 14th centuries, his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today.[22] Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in vernacular Italian, and it was a printed book.
Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (trans. "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (trans. "Details of Accounting and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra.
According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale ( trans. memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.
The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system's precision and the normalizing effect that precision tended to create the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers.
MEANING OF ACCOUNTING
The art of recording , classifying and summarizing , in a significant manner and in terms of money , transaction and events which are, in part at least, of financial character, and interpreting the result thereof."
The three important aspects of accounts have been highlighted by the above definition.
1. Account as an Art & science.
2. Accounting is done for Business transaction.
3. Accounting is a system.
OBJECTIVES OF ACCOUNTING
•Record business activities in a systematic manner.
•Evaluate the performance of the business in terms of profit.
•Know the financial position of the business.
•Control business activities effectively.
•Provide information to various stake holders in the business.
BASIC TERMS IN ACCOUNTING
•Entity: Entity has a definite individual existence. Business Entity is an identifiable business enterprise such as Super Bazaar, etc.
•Transaction: Transaction is an event involving some value between two or more entities
•Assets: Assets are economic resources of an enterprise that can be expressed in monetary terms.
"Fixed Assets" are assets held on a long term basis such as land, buildings, etc.
"Current Assets" are assets held on a short term basis such as debtors, bills receivables, etc.
•Profit: Profit is the excess of the revenues of a period over its related expenses during an accounting year. Profit increases the investment of the owners.
•Gain: Gain is a profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.
•Loss: The excess of expenses of a period over its related revenues is termed as Loss.
•Discount: Discount is the deduction in the price of goods on sale.
•Voucher: The documentary evidence in support of a transaction is known as Voucher.
•Goods: Goods refer to the products which a business unit produces and sells, or by and sells.
•Drawings: Withdrawal of money and/ or goods by the owner from the business for personal use is known as drawings. Drawings reduce the investment of owners.
•Purchases: Purchases are a total amount of goods procured by business on credit and cash, for use or sale.
•Stock: Stock (inventory) is a measure of something on hand - goods, spares and other items in a business. It is called 'Stock in hand.'
•Debtors: Debtor's persons and / or other entities who owe enterprise money, having bought goods and services on credit.
•Creditors: Creditors are persons and / or other entities who have to be paid by an enterprise for providing goods and services on credit.
ACCOUNTING ASSUMPTIONS
•Money measurement concept: Every accounting transaction is major in terms of money.
•Dual entity concept: As per this concept an accountant assume that business & businessman are two different entities.
•Going-concern concept: According to this assumption while doing the accounting it is assumed that business will continue for fairly longer period of time.
•Cost concept: This concept is applicable only for fixed assets accounting purpose it states that while computing the cost of fixed assets all the incidental expenditure for the acquisition of the assets should be added in cost fixed assets.
•Dual-aspect concept: This is the fundamental accounting assumption which state that every transaction has too folds effect positive or negative in accounts it is dr. & cr.
•Periodicity concept: Every accounting is divided in smaller periods as per this concept.
•Cost attach concept: While computing the revenue earned by the organization all the incidental expenditures required to earn such a revenue should be accounted for as per this concept .
•Accrual concept: As per this concept revenue or expenditure should be accounted for only on the basis of the certainty of that revenue receives or expenditure paid actual payment or receipts is irrelevant.
•Legal aspect concept: When there is a conflict between laws & accounting account should follow law procedures first.
MEANING OF ACCOUNTING OR LEDGER
A ledger is the summery of all the transactions relating to any person, thing, an assets or liability.
References: Indiataxes.com,wekipedia.com,M.Com text books, B.Com text Books
Accounting is thousands of years old. The earliest accounting records were found in the Middle East which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.
Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.
Accounting has also been defined by the AICPA as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."
Etymology
The word "Accountant" is derived from the French word "Compter", which took its origin from the Latin word "Computare". The word was formerly written in English as "Accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation and in orthography to its present form."
History
The earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned.
Luca Pacioli and double-entry bookkeeping
(Father of Double Accounting System was Luca Pacioli)
A double-entry bookkeeping system is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form. The oldest discovered record of a complete double-entry system is the Messari (trans. treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.
Although Luca Pacioli did not invent double-entry bookkeeping, which was developed by merchants in northern Italy sometime during the late 13th or early 14th centuries, his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today.[22] Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because of its wide circulation, it was written in vernacular Italian, and it was a printed book.
Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (trans. "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (trans. "Details of Accounting and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebra.
According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale ( trans. memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.
The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system's precision and the normalizing effect that precision tended to create the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers.
MEANING OF ACCOUNTING
The art of recording , classifying and summarizing , in a significant manner and in terms of money , transaction and events which are, in part at least, of financial character, and interpreting the result thereof."
The three important aspects of accounts have been highlighted by the above definition.
1. Account as an Art & science.
2. Accounting is done for Business transaction.
3. Accounting is a system.
OBJECTIVES OF ACCOUNTING
•Record business activities in a systematic manner.
•Evaluate the performance of the business in terms of profit.
•Know the financial position of the business.
•Control business activities effectively.
•Provide information to various stake holders in the business.
BASIC TERMS IN ACCOUNTING
•Entity: Entity has a definite individual existence. Business Entity is an identifiable business enterprise such as Super Bazaar, etc.
•Transaction: Transaction is an event involving some value between two or more entities
•Assets: Assets are economic resources of an enterprise that can be expressed in monetary terms.
"Fixed Assets" are assets held on a long term basis such as land, buildings, etc.
"Current Assets" are assets held on a short term basis such as debtors, bills receivables, etc.
•Profit: Profit is the excess of the revenues of a period over its related expenses during an accounting year. Profit increases the investment of the owners.
•Gain: Gain is a profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.
•Loss: The excess of expenses of a period over its related revenues is termed as Loss.
•Discount: Discount is the deduction in the price of goods on sale.
•Voucher: The documentary evidence in support of a transaction is known as Voucher.
•Goods: Goods refer to the products which a business unit produces and sells, or by and sells.
•Drawings: Withdrawal of money and/ or goods by the owner from the business for personal use is known as drawings. Drawings reduce the investment of owners.
•Purchases: Purchases are a total amount of goods procured by business on credit and cash, for use or sale.
•Stock: Stock (inventory) is a measure of something on hand - goods, spares and other items in a business. It is called 'Stock in hand.'
•Debtors: Debtor's persons and / or other entities who owe enterprise money, having bought goods and services on credit.
•Creditors: Creditors are persons and / or other entities who have to be paid by an enterprise for providing goods and services on credit.
ACCOUNTING ASSUMPTIONS
•Money measurement concept: Every accounting transaction is major in terms of money.
•Dual entity concept: As per this concept an accountant assume that business & businessman are two different entities.
•Going-concern concept: According to this assumption while doing the accounting it is assumed that business will continue for fairly longer period of time.
•Cost concept: This concept is applicable only for fixed assets accounting purpose it states that while computing the cost of fixed assets all the incidental expenditure for the acquisition of the assets should be added in cost fixed assets.
•Dual-aspect concept: This is the fundamental accounting assumption which state that every transaction has too folds effect positive or negative in accounts it is dr. & cr.
•Periodicity concept: Every accounting is divided in smaller periods as per this concept.
•Cost attach concept: While computing the revenue earned by the organization all the incidental expenditures required to earn such a revenue should be accounted for as per this concept .
•Accrual concept: As per this concept revenue or expenditure should be accounted for only on the basis of the certainty of that revenue receives or expenditure paid actual payment or receipts is irrelevant.
•Legal aspect concept: When there is a conflict between laws & accounting account should follow law procedures first.
MEANING OF ACCOUNTING OR LEDGER
A ledger is the summery of all the transactions relating to any person, thing, an assets or liability.
References: Indiataxes.com,wekipedia.com,M.Com text books, B.Com text Books
Friday, December 4, 2009
Introduction
Hai all of you,
Its a small blog expaining meaning & practicability of Commerce & Business. We are trying to cover all portions(Meaning,definitions,terms, details of new product ect.) relating to business... and open a comment option to all guys to answer our questions....(if you don't know the correct answer, please....note your required knowledge under the space of the question)..We update new questions in a week. I am expecting a favourable response from all sides.
I hope this Blog will help all commerce & management students.
Thanking you ones again..
paambri
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